Former financial secretary Antony Leung Kam-chung says the government's plan to boost the housing supply could flood the market with more flats than it can absorb if interest rates rise owing to a rally in the US economy.

Leung warned of a repeat of the failed "85,000 flats a year" target announced by then chief executive Tung Chee-hwa in 1997. By the time the new flats were ready, he said, the market would have shrunk due to external economic factors, leaving it unable to absorb all the flats.

Leung, a member of the Executive Council from 1997 who was named financial secretary in 2001, said the new administration was right to address the city's housing problem by increasing supply. But he was worried about complications arising from the US economy.

Asked if he thought the market slump following the announcement of the government's target of 85,000 flat completions a year would repeat itself, Leung said: "It is possible." He added that a rise in real interest rates led to the 1997 target not being met.

"Our inflation rate follows the mainland market, but our interest rate is tied to the US rate because of the linked exchange rate. We've had quite a seriously negative real interest rate for the past few years," he said.

"When this interest-rate environment changes, the property market will turn downward," Leung, a former banker who now works for investment firm Blackstone, said.

The target set in 1997 was affected by external factors, he said. The administration quietly abandoned the target the following year as the economic impact of the East Asian financial crisis was felt, but Tung only publicly confirmed in 2000 that it had been dropped two years earlier. Although the target was achieved in 2000 - with half the flats produced for private or subsidised sale the rest for public rental - by then the market had slumped.

The Hong Kong Association of Banks sounded a similar warning to Leung's last month, saying higher interest rates would mean an increase in monthly repayments for mortgage-holders.

The US Federal Reserve expects to keep interest rates at near zero until the unemployment rate drops to 6.5 per cent, which it forecasts to happen by 2015. But many economists fear the rate may change earlier.

Meanwhile, the Long Term Housing Strategy Committee met yesterday to discuss whether there should be a minimum income level for applicants for subsidised flats under the Home Ownership Scheme flats, said Secretary for Transport and Housing Professor Anthony Cheung Bing-leung. The scheme has only a maximum monthly income limit of HK$40,000.

"It sounds strange that some applicants say they have no income. If they don't, how will they pay the mortgage?" said Cheung, referring to Greenview Villa, a subsidised housing project that drew almost 60,000 applicants last month. The committee will make a decision later.

This article appeared in the South China Morning Post print edition as Tung's flat fiasco 'at risk of recurring'

While HK should try to reduce cage homes, a property collapse a la SARS is worse.
Those wishing for a crash for their own selfish reasons should remember it was when unemployment was likely near 10% and most homes were in negative equity when prices were off 70%. That is why 1m middle class folks, who generate 90% of income, were out on the streets. This is what govt fears this more as if we lose the middle class then HK is doomed.
So watch what you wish for - cheap homes with no jobs, future for HK? Property crash always worse (ask those in US, Spain Greece Ireland etc). Hopefully govt can find a middle route.

I am a home owner myself, and it is not selfish that I wish home price would come down to a more affordable level. The house price now is getting so high that even the middle class folks cannot afford. Negative equity on a principal residence is no big deal as long as the government has policy in place to ensure the bank will not foreclose the homes in question when the mortgage payment can be kept up. I don't feel sorry for those who owns multiple flats and cry about negative equity.

megafun Feb 3rd 20131:49pm

Anthony did not take into account of previous proposals that the Gov ought to set up an "agency" that provides security to "first-time buyers" for a 90 - 95% mortgage. That will stabalize the market, and slow down any panic fall in prices - if the economy goes down or interest rates goes up. Negative equity, is nothing strange, as long as Banks has no fears on defaulting. Since Gov-backed "first-time buyers" should be local, they're unlikely to "run-off" or go bankrupt.